Month: March 2019

Protectionism represents any attempt to impose restrictions on trade in goods and services. The main example of protectionism is an increase in tariffs. Governments imposing tariffs look to restrict imports of foreign goods and services in order to protect its own industries.

An increase in protectionism in a developing country can raise tax revenue for the government. Higher tax revenue can be used to develop industries within the economy. For example, Iran (which has an average import tariff rate of 29%), can use the generated income from tariffs to invest into infrastructure for its growing mining industry, which has been generating thousands of jobs for its population over previous years. If the tax revenue is allocated correctly within this industry, then Iran can continue to expand its mining infrastructure and this would attract foreign investment. This would allow Iran to grow economically and be able to compete with other mining superpowers like Russia and South Africa.

Furthermore, more jobs are created which would reduce unemployment, which in the long term will further increase the tax revenue of Iran as per capita incomes increase which means the taxation of the domestic economy increases. However, it can be argued that protectionist tariffs risk causing a loss of competition for domestic firms due to a reduction in foreign imports, which eventually leads to lower productivity, less innovation and weaker competitiveness. This can in the bigger picture damage Iran’s growing mining industry if other countries notice that Iran’s economy is not productively efficient, leading to them investing in other countries’ mining industries in order to maximise their returns from investments. So although an increase in protectionism has the potential to boost a developing country’s economy, it can damage domestic industries which is the opposite of what protectionism intends to do.